Commodities index no substitute for gold, research shows
Published 12 April, 2011
Investors who assume that an investment in a commodity index provides effective gold exposure are failing to optimise portfolio performance, according to a new study published today by the World Gold Council. In its latest report, Gold: a commodity like no other, the World Gold Council examines gold’s role in a diversified portfolio with an allocation to commodities. The analysis shows that a modest, consistent holding of gold increases long-term risk-adjusted returns in a way that a commodities basket alone does not.
Within indices such as the S&P Goldman Sachs Commodity Index™ (S&P GSCI) or the Dow Jones UBS Commodity Index™ (DJ-UBSCI), gold’s weighting typically ranges between just three and seven percent. Thus, while investors typically get some exposure to gold when using one of these indices as a benchmark, its total weighting is small. For example, for an investor with a ten percent overall allocation to commodities, the effective exposure to gold is as low as 0.3 percent using the S&P GSCI and only as high as 0.7 percent when using the DJ-UBSCI.
Juan Carlos Artigas, Investment Research Manager at the World Gold Council, commented:
“Commodity allocations have become more common among investors seeking diversification. It is often assumed that an investor in commodity baskets will, by default, profit from gold’s ability to protect wealth. Our research makes clear that to achieve true diversification an allocation to an outright position in gold provides benefits that cannot be replicated simply by investing in a wider commodities basket.
“This paper, therefore, supports the premise that gold should be viewed as a separate, distinct asset class, and a foundation to a well diversified investment portfolio.”
In previous studies, the World Gold Council has demonstrated that a gold allocation of between two and ten percent of the overall portfolio is required to increase risk-adjusted returns and protect investment performance 1. Today’s findings suggest that portfolio managers and investors who already have exposure to commodities in their portfolio stand to benefit from including gold as a separate strategic asset class, without compromising long-term returns.
Marcus Grubb, Managing Director of Investment, the World Gold Council, added:
“The reason that gold can consistently act as a highly effective portfolio diversifier and risk management tool is rooted in its fundamentals. These characteristics combine to produce a very different reaction to economic and financial variables than other commodities. Gold’s correlation to the wider commodity complex tends to be low; it is less exposed to swings in business cycles, typically exhibits lower volatility, and tends to be significantly more robust at times of financial duress. This gives investors who hold gold the confidence to invest in other assets irrespective of wider market or macro-economic conditions.
“Gold’s physical attributes, the sheer diversity of its application and the size of the global gold market set it apart from other commodities.”
Gold is not only different from other commodities with respect to its performance, volatility, correlation and its composition of demand and supply, the gold market is also very large and liquid. Financial gold holdings, which include gold in public and private hands, are equivalent to US$2.4 trillion based on the average price of gold in 2010. To put that into context, the gold market is larger than any single European sovereign debt market, yet it is no-one’s liability. The gold market is even comparable to the size of US government-guaranteed debt, otherwise known as the agency market 2. Further, even when comparing the size and liquidity of the gold futures market, a fraction compared to the gold bullion market, relative to that of other commodities, gold ranks highly in both size and liquidity.
1 World Gold Council, Gold as a tactical inflation hedge and long-term strategic asset, July 2009; and World Gold Council, Gold: hedging against tail risk, September 2010.
2 Total amount of US Agency debt outstanding is $2.7 trillion dollars as of Q4 2010. Securities Industry and Financial Markets Association (SIFMA).
For further information please contact:
World Gold Council
T +1 917 224 6473
T +44 20 7307 5342